Converted from LLC to S Corp Mid Year

[mag0609]

I converted my business from an LLC (taxed as partnership) to a Corp, effective 7/1/2018 with the state.  For 2017, I filed Form 1065, but I did not mark it as final.  What form will I need to file for 2018 return? Both a 1065 and 1120S? I am also wanting to do an S election.

[Carl]

YOu will file a final 1065 for the partnership LLC with a close date for that business of Jun 30, 2018. Make sure all issued 1065 K-1's are marked as final too. Assuming the same parners will own the S-Corp, all assets need to be removed from the partnership for personal use, and distributed to the owners as appropriate. Same for any inventory if inventory is involved here. Remember, in order to completely and correctly report the partnership as closed, that partnership must "get rid of" all assets, all inventory, and all vehicles, and any remaining cash left in the partnership. The IRS does not consider your partnership closed until absolutely everything is disposed of in one form or another.

Then for the 1120-S which has a completely separate EIN from the partnership, all assets, inventory, and cash are transferred into it as capital contributions by the members the LLC assets, inventory and cash were distributed to. (If you don't do this, then the members will pay taxes on any gains that were distributed to them from the LLC).

Now THIS IS IMPORTANT! If you do this wrong, all the depreciation on business assets will be wrong. For the S-Corp, the start date of the business will be the same start date the partnership started and was opened. IT MUST be the same. Otherwise, you're going to have major issues with prior years depreciation on any and all depreciable assets.

Then the incorporation date will be one day AFTER the partnership LLC closed.  See attached picture for the screen I'm referring to in the TurboTax Business program, for the 1120-S.

[mag0609]

I did not realize that entailed so much, especially changing the EIN and such.  It seems to be it would be easier to just remain an LLC but elect to be taxed as an S-corp.  That is the sole purpose I wanted to convert in the first place, for tax purposes.  Thank you for your information

[Carl]

For starters, filing the 8832 to have an LLC "treated like an S-Corp" for tax purposes, changes absolutely nothing for what you need to do. If you want the IRS to treat your LLC "like an S-Corp" then the business must "act" like an S-Corp. It's subject to all the laws, rules, regulations and requirements of an S-Corp. Additionally, the 8832 is *FOR TAX PURPOSES ONLY* and nothing else. That means if a client sues your business, they are suing your LLC which does not have the same "veil of protection" as an S-Corp does. Your 8832 S-Corp election is only recognized by the IRS and that's it. So for example, if I'm suing your business, I'm not suing you in tax court. I'm suing you at the state level or lower and your S-Corp election means nothing to the lower court, since it's registered in your state as an LLC.

Additionally, the quarterly filing requirements imposed on an S-Corp of the state your business is registered in (even though it's registered as an LLC) must be adhered to, to maintain your IRS recognition by the IRS as an S-Corp "for tax purposes only".

So filing the 8832 changes nothing. You still have to close the LLC with the IRS, and transfer all assets to the S-Corp.